24 January 2011

Republicans and Math Still Don't Mix

Republican Senator Pat Toomey writes in the Wall Street Journal defending the irresponsible stance of Republicans to oppose an increase in the national debt limit: "With roughly 10 times more income than needed to honor our debt obligations, why would we ever default?”


Total National Debt: $14.0 trillion
Annual Principal Payment: $2.5 trillion
Annual Interest Payment: $360 billion
Ten Times Annual Interest Payment: $3.6 trillion
Annual Federal Tax Revenues: $2.5 trillion

The annual cost of running the government is about $3.75 trillion.

As Maule explains, if the debt ceiling isn't increased, people stop loaning the United States money:

The entirety of all federal receipts would be required to pay off the investors holding the obligations that have come due. I’m not sure where the government would find $360 billion to pay interest.

Not only would nothing be put into the social security and Medicare trust funds, those funds would not be able to make any payments, because their “assets” are tied up in Treasury debt which would not be convertible into cash because the Treasury would not have the resources to redeem that debt. There would be no money to finance the military, to staff and operate Homeland Security, the FBI, the CIA, the Center for Disease Control, the Food and Drug Administration. Taxes would be paid, but all federal government services would stop. Perhaps the Federal Reserve could churn out dollar bills, but the resulting inflation would dwarf that of the late 1970s and inject hyperinflation into the economy.

Realistically, someone would let us refinance our maturing national debt, but at a higher interest rate that would greatly increase the cost of the national debt. Even if investors think that there is only a one in twenty-five chance of default in the next year, this would cost American taxpayers $520 billion a year, plus $140 billion a year per percentage point of anticipated inflation, all of which would have to come out of spending since we couldn't borrow any more money.

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